Conversation: The Sports Recession

Andrew Zimbalist is the Robert A. Woods Professor of Economics at Smith College and an expert on the business of sports. He has consulted for players’ unions and franchises and for the Ken Burns documentary “Baseball.” We spoke last week about professional sports and the recession. An edited transcript of our conversation follows.

Has the recession shattered any driving assumptions about major-league sports?

It’s been a cliché that sports are too ingrained in the culture to be impacted by a recession. The idea was that if people get laid off or their incomes stagnate, they need distraction more than ever, and the best distractions are the sports they love the most. In the old days, when you used to be able to go to Yankee Stadium for three dollars and fifty cents to buy a box seat, that kind of assumption held. People would be able to find the extra money or substitute the ballgame for other kinds of spending.

But today, a box seat at Yankee Stadium isn’t three fifty; you pay twelve hundred and fifty dollars for the best box seat. It’s the same at other ballparks—the scale is different, but the jump is the same. Ballparks have been gentrified since Camden Yards, in 1992, when Larry Lucchino and the Baltimore Orioles moved their stadium downtown next to the business district. There’s been a drive to bring the corporate dollar, the corporate sponsorships, the corporate employees into the ballpark, and it’s been successful. It’s not as easy for the average fan to say, “I’m going to set aside enough money so I can still take my family to the ballpark.”

Another thing is that in the seventies and eighties the owners got the lion’s share of revenue from selling tickets and a little bit more from selling national television contracts through the league. Today, teams are increasingly earning revenue from other sources—corporate sponsorships, signage at the ballpark, catering at the ballpark, the Internet, and so on. All of these new sources of revenue lean more heavily on higher-income groups and discretionary spending, and are much more affected by forces in the macroeconomy.

And, to repeat something that’s been said a lot over the last six months, this recession is different. It can’t be sloughed off like the previous ones.

What kind of effects are we seeing in Major League Baseball?

Attendance is down about five per cent this year. That news comes on the end of a string of thirteen years where attendance went up and revenue went up at a clip of eleven per cent per year. That was the average annual growth of revenue in baseball since the strike of 1994-95. Now that growth has stopped, and we’re probably seeing a reversal.

At Yankee Stadium and Citi Field they have less capacity than they did at the old stadiums, and they’re still not selling out. A lot of sponsors have dropped out. Certainly the automobile sponsors are disappearing in baseball, as they have in other sports. Of course, the sport that has been hit most acutely by the recession is NASCAR—they depend most heavily on the automobile industry.

Did any of the leagues anticipate an end to the boom, or did they just assume that salaries and sponsorships would keep on rising? Did any league prepare itself well for the collapse?

Sort of. Other than Nouriel Roubini at N.Y.U., not many people saw a collapse coming. People in the financial sector certainly didn’t see a collapse coming. You’d hardly expect David Stern and Bud Selig and Roger Goodell and so on to anticipate something that the country’s leading economists and finance gurus didn’t anticipate.

But they did make some moves when they saw instances where the economic problems were creeping up on us. The N.B.A. laid off ten per cent of its front office, and the N.F.L. did something very similar. The N.B.A. is projecting lower basketball-related income going forward, which should, if it holds up, lower the salary cap. Baseball teams have heavily discounted tickets and have increased the number of comps that they’re giving out to the community.

For, say, an N.B.A. fan, how is following a team going to be different during the recession?

The main story for the average N.B.A. fan is that ticket prices are going to stay more or less where they’ve been. If you’re unemployed now and you used to be employed in a job that earned you a solid income, it’s going to be much more difficult to attend games. But if the unemployment rate is basically at sixteen per cent (that is, if you include discouraged and part-time workers pro rata), that means five out of six workers still have their old jobs. So when I describe the average fan not being able to do these things, I’m talking about only one-sixth of the labor force. The remaining five-sixths, I think, will still indulge their fandom.

How will leagues be affected by the rush to cut labor costs? You’ve already seen it this offseason in the N.B.A., where teams are focussing on cutting salary instead of trying to win, with very few exceptions.

You have to remember that in N.B.A., N.F.L., and N.H.L. they have salary caps. It’s a maximum amount, sometimes with some loopholes, that teams can spend on their players. They also have salary floors, which range from roughly seventy-five to ninety per cent of what the cap is—so teams don’t have the kind of flexibility that exists in Major League Baseball.

So you might see some tweaking at the margin. But most teams see themselves as having a decent shot of getting into the postseason, if not the championship, and teams are mostly maneuvering within the rigidities of the cap system in order to assemble the best roster they can.

If league revenue goes down, the cap will go down. Some of the reductions you may see will be out of anticipation that revenue will be lower next year than it was the previous year.

And what’s that going to do to the labor relationships between players and owners?

It’s going to severely challenge them. It’s easy to get along when times are good and money is flowing; it’s much harder to get along when you see stringencies and cuts. N.B.A. players, for example, have already challenged the revenue projections that David Stern put out for the next economic year. So they have a lot to talk about.

But I also believe that labor relations in all of the sports have matured enormously in the last ten or fifteen years.

How so?

Well, they introduced free agency in baseball in 1976, and the other leagues followed in the next decade. The players had been moving from a situation of profound exploitation to one where they were more or less developing the free labor rights that everybody else had. They had organized themselves into a very tight-knit union, and the owners kept trying to resist, even after free agency came into existence. So the players were geared for battle. That provided the makings of a tumultuous relationship.

Over time, though, the owners realized their revenues were growing by leaps and bounds, and if they imposed certain constraints, they could live quite well with the free agency system. The players, meanwhile, were getting richer and richer. Back in the days when free agency was introduced, the average player salary was below $100,000. Today, in baseball it’s 3.2 million dollars, in basketball it’s near five million dollars, and in football and hockey it’s about 1.7 million dollars.

These are guys who are extraordinarily wealthy, and also get a lot of endorsement income, which they wouldn’t be getting if there was a strike or a lockout, and the career of a professional athlete is relatively short. Most of them stay around for three or four years, and none of them want to see one-third of their career wiped out by a work stoppage. They want to keep playing.

Both sides, I think, have learned the lessons and been chastened by the work stoppages of the past and seen how fans react violently to them.

How did America develop these incredibly rigid sports institutions, while in Europe the leagues are just much more freewheeling? You can sell and trade players, teams move in and out of leagues and there aren’t restrictions, and it reverses every stereotype we have about our different economies.

Let me give a sense of what I think is going on. The European model of professional sports came out of British football. Initially in the nineteenth century there were all these local competitions, which were organized by what was called the Football Association into a national competition. Some of the local areas felt like they weren’t getting a fair shake and decided to form professional leagues. In order to give everyone a fair shake, the leagues were structured as a hierarchy, where if you finish at the top of a lower league you get to move up, and if you finish at the bottom you get demoted.

So it was set up as a model of sporting competition, and the teams, until recently, were always run as clubs, not corporations. Profit was never a motive.

In the United States, the model was established by the National League in baseball, which William Hulbert founded in 1876, and was driven by profit. Every institution in the league was supposed to be profitable. And you can make a league more profitable by limiting the number of teams in it, and strictly controlling the number of teams and where they play. And they introduced the reserve clause to keep player salaries down.

You were a consultant to Bruce Ratner on the Atlantic Yards project—

I haven’t consulted with him since I wrote my last report, which I think was in 2004.

Part of the idea was that building Atlantic Yards—the arena, all the development—would be a major boon for business. How much economic benefit do stadiums and arenas actually bring when they are built with public money?

Arenas and stadiums, by themselves, cannot be expected to produce an economic benefit to the local community. It can’t be expected to increase the employment level in the community, and it can’t be expected to raise per capita income. And that’s a straightforward conclusion that comes from detailed econometric analysis that spans thirty to forty years. That doesn’t mean there can’t be a modest benefit in particular cases, though.

But the research says that, on average, there’s no economic benefit. In regards to Atlantic Yards, there were two things that were different, as I studied it. You were moving the team—the New Jersey Nets—over the tax jurisdiction line to New York State and New York City. That meant that Brooklyn was going to be able to cannibalize New Jersey revenues. The second thing that was different, and this is more typical of recent stadium and arena deals, was that Ratner’s plan at the time was that he was going to build a $500 million arena and a $3.5 billion community development that would encompass twenty-one acres and involve retail and commercial space and mixed-use housing.

So there was going to be a lot of private investment. It wasn’t simply looking at the project as a basketball arena and nothing else, but it was looking at the entirety of the project, which was seven times larger than the arena.

Do you think there will be a backlash against publicly financed stadiums? If you were a voter in a cash-strapped state, what would you be looking for in a deal?

Cities don’t build a public park because they expect it will bring in higher income; they build it because they think it’s good for the social and cultural fabric of their community. A city might look at a ballfield or an arena in the same way—if you can make a case that building a stadium will be economically neutral, you might want to go ahead and do that, because you think a team will provide a source of cohesion, identity, wholesome family entertainment.

And how often does that happen?

If you interview most people who vote for stadium initiatives, they vote on that basis. One of the things that happens during a stadium drive is that the proponents go out and hire a consulting firm to come up with a predetermined conclusion that the stadium will be the cat’s meow for the local economy.

They hire this company, and then they publicize the results of the study, and there might be three or four or five per cent of the community, swing voters, that say, “I might not like baseball or basketball or football, but there’s a hard study that says this will help the local economy.” Those studies are used to get the people sitting on the fence, but most of the people are voting yes because they love sports and want a team.

If I had, say 500 million or a billion dollars, and I wanted to buy a sports team, would it be worth it? Where do you think I could find value?

Bruce Ratner wants to sell a piece of the Nets. Want me to call him up? I’ll tell him you’re interested.